The High Court has ordered a law firm to disclose details of its litigation funding arrangements with two clients so that the successful defendants can determine whether the solicitors financially supported the cases. If they did, the defendants may pursue the law firm for a third party costs order.

The conjoined cases of Germany v Flatman and Barchester Healthcare v Weddall were both run by Norwich-based Godfrey Morgan Solicitors (GMS) under conditional fee agreements (CFAs) without after the event insurance.

The Defendants successfully defended the claims but the Claimants were without funds and there were no real prospects of paying the Defendants’ costs.

The Defendants’ common insurer suspected, purely on the basis of inference, that the claims were funded to some extent by the solicitors. In the first case, the Claimant was unemployed at the time of the accident and was claiming for three years loss of earnings.

Accordingly, the Defendants applied for GMS to be joined as a party and for an order revealing how the claim had been funded. If funded by the law firm, the issue could be raised that the solicitors had stepped outside the “normal role” of a solicitor (including the normal role of a solicitor involved in CFA litigation) and therefore is shown to have become a litigation funder “in the way of business”. This would allow an Application for a third-party costs order.

In the first instance, Judge Maloney refused to grant disclosure of the funding documents on the basis that this would open the floodgates – that the impact of such orders “could be to undermine or perhaps even destroy the workings of the CFA system” inferring this would be against public policy.

In the High Court, Mr Justice Eady took a different view, stating it was necessary not to lose sight of the public policy aim of discouraging weak claims and that if partially funded by the solicitor, even a “small investment with a view to significant gains”, then it should carry the risk of having to pay the Defendants’ costs, or part of them, if ultimately unsuccessful.

The High Court judge said: “If the solicitor pays for the court fees (say) or expert reports at the beginning of a personal injury claim, on the basis that the client will reimburse him later, there is nothing inherently improper about that.

On the other hand, if the sums are paid out by the solicitor, whether from client account or office account, on the basis that they will be recovered from the other side, in the event of success, or not at all in the event of failure [Eady J’s emphasis], that would be a different matter.

The solicitor would indeed then have become a funder, albeit sometimes in only a small way. He may have the capacity to make the difference between the defendant in question being sued, with all the cost and vexation involved, and his being left in peace.”

Mr Justice Eady found that the judge at first instance had “overestimated the consequences of the Defendants’ applications for the day to day working of the CFA regime as a whole” and that each case should turn on its facts.

Therefore, “It may be necessary to make an order for disclosure of documents to help a “vulnerable defendant, or for that matter his insurer” establish what exactly passed between the claimant and his solicitor,” he continued.

The order was made to disclose the documents and in the words of Mr Justice Eady, “Whether, following disclosure, an application for a third-party costs order is made, that is a matter for the future.”

Lessons to be learnt:

– A law firm providing litigation funding to its clients, even on a “small investment” basis, may leave the firm vulnerable to a third-party costs order
– If litigation financing is required, it is safer for the law firm to pass this to a third party funder or broker
– ATE insurance to cover adverse costs removes many of these issues

At TheJudge, we’re happy to discuss financing issues with law firms and clients and we’re confident that we can provide invaluable advice and expertise in choosing the right litigation funding solutions. Contact one of our team for more information.